A Financial Storm Is Brewing in Europe. Where to Hide.

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Barrons: Louis-Vincent Gave, co-founder of Gavekal Research, has been warning investors about a paradigm shift in the world order. Specifically, Gave says the assumptions underpinning financial assets need to be rethought due to a move toward a multipolar world and away from one dominated by the U.S. and the dollar. His message seems especially germane now, given Russia’s invasion of Ukraine, the West’s dramatic sanctions, and China’s attempts to support Russia without jeopardizing its economic ties with the West.

Gave recently spoke with Barron’s from his office on Canada’s Vancouver Island about why China could emerge as a relative winner from the war in Ukraine. He also explained why long-held assumptions about globalization and the dollar’s dominance need to be reassessed, and why it isn’t yet time to buy stocks, even after their correction. An edited version of the conversation follows.

Barron’s: What is the likely fallout for investors from Russia’s invasion of Ukraine?

Louis-Vincent Gave: We have two crises. The sanctions on Russia have turned an already precarious energy situation into a full-blown crisis. From there, we’re going to have a problem with food costs, which will lead to riots, political uncertainty, and the rise of populist parties in democracies. And we have an unfolding financial crisis. Financial markets are based on trust and everybody playing by the same set of rules. In war, trust collapses and rules change quickly.

The big question is whether the Western world blocking Russia’s foreign reserves and saying, “You thought this money was yours; turns out it isn’t,” acts as an accelerant for a change in the global financial architecture such as we have known it in the post–Bretton Woods era—where all trades are denominated in U.S. dollars, and foreigners earn U.S. dollars and recycle those into U.S. Treasuries, allowing the U.S. to run very large twin deficits with no constraints.

Let’s take energy first. What do soaring prices mean for investors?

China is the big winner. In September, China’s leadership said we are entering an energy crisis and reopened coal mines. Coal is the cheapest way to produce electricity, and the guy with the cheapest cost of electricity typically wins [economically]. From 2000 to 2011-12, that guy was China. Starting in 2012, pollution led the Chinese to [reduce the production of coal].

The mantle of the cheapest energy producer then moved to the U.S. due to the shale revolution. Now, the mantle is moving back to China, which not only has coal but also is going to become one of the only outlets for Russian energy. And better yet, for the Chinese, Russian energy is going to settle in renminbi or gold, not dollars. Read More …

Opinion: The devil is in the details, and that last sentence, “And better yet, for the Chinese, Russian energy is going to settle in renminbi or gold, not dollars” sums up a dozen posts, or more, we have been writing about for months.

  • Yuan – the unit of account of the country’s economic and financial system
  • Renminbi – the official currency of China where it acts as a medium of exchange

The US dollar has been the world reserve currency since 1944. King dollar may be sharing world reserve status with another nation’s currency according to a March 2, 2022 comment by Jay Powell, Chairman of the Federal Reserve: “It is possible to have more than one reserve currency”.

That statement stunned me almost as much as Saudi Arabia’s comment that they are considering settling oil trades with China in renminbi.

At the end of the day who wins this game of oil roulette? At this point, barring a sudden change in the Russia/Ukraine war where Russia suffers a defeat, China seems to hold all the cards.

  • USA – out of the oil producing business and settling for windmills
  • Russia – financially disconnected from the West for exports
  • China – the only nation that can absorb Russia’s exports
  • Iran – in bed with Russia and China
  • Saudi Arabia – angry at Joe Biden over Iran nuclear deal

ArticleFor years, China had to earn U.S. dollars first to buy energy. The Chinese stockpiled dollars. Now, they don’t need to do that because they are producing domestic coal—priced in renminbi—and they can buy energy from Russia, priced in renminbi that they can just print. In essence, their energy cost is almost free. If China doesn’t need U.S. dollars, does it care about having a positive trade balance with the U.S. through which to generate excess dollars? It doesn’t, so the renminbi could go much higher.

How does all this relate to Bible prophecy?

There is no nation resembling America in the final wars of this age.

Get ready to duck…